In the space of two days during this week’s coronavirus stock chaos, the New York Federal Reserve Bank announced that it was 1. Increasing the amount of cash it was pumping into the market daily from $100 billion to $150 billion. 2. Increasing the $150 billion number to $175 billion, and 3. Adding $1.5 trillion to the market in repo injections.
Corporate America is facing its most severe test since the 2008 financial crisis due to a viral pandemic and falling oil prices. Some of the biggest names in the U.S. are “grabbing cash before it can disappear” and maxing out credit lines, Bloomberg reported.
These include Boeing, which drew down a $13.8 billion term loan, and Hilton Worldwide Holdings Inc. and Wynn Resorts Ltd., which leaned harder on credit facilities totaling more than $2.5 billion.
The liquidity flood gave yields a significant bounce, Axios reported. Yields on the 10-year Treasury note rose as high as 0.91 percent Thursday, 60 basis points higher than Monday’s record low. Yields on the 30-year bond also jumped to a high of 1.50 percent, up 80 basis points from Monday’s record low of 0.7 percent.
The first step involved an offer to purchase $500 billion in a so-called “repo operation” beginning Thursday. That $500 billion purchase will be followed by two more $500 billion rounds — one today and one in a month’s time — along with other ongoing repo operations.
A repo operation is an effort to keep interest rates in the Fed’s preferred range, USA Today reported. The $1.5 trillion market injection aims to calm investors who are afraid of the economic impact of the coronavirus.
“It looks like QE (quantitative easing),” said Priya Misra, head of global rates strategy at TD Securities, in a Reuters interview. “It is QE.”
Quantitative easing is an unconventional monetary policy tool used after conventional tools have become ineffective, said Nancy Davis, portfolio manager of the IVOL ETF and founder of Quadratic Capital, in a November 2019 Fortune interview.
QE helped get the U.S. economy out of the Great Recession. However, in late 2019, the Fed denied it was engaging in QE when it engaged in repurchase-agreement activity and bought Treasury bills of up to $60 billion a month.
Critics argued that if the Fed’s balance sheet is growing and so are excess reserves in the banking system, it’s the very definition of QE, Marketwatch reported. The operation, dubbed QE4, was supposed to carry through the second quarter of 2020, according to the Fed’s statements.
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Enter coronavirus. The moves to flood the short-term funding markets with liquidity are being made “to address highly unusual disruptions in Treasury financing markets associated with the coronavirus outbreak,” the Fed said in a statement.
The rush for cash is not enough to stress a banking system that’s been holding excess reserves for years, but it shows how quickly things can change in an economy that seemed healthy until a few weeks ago. Now that the coronavirus has gone global, supply chains have been disrupted and consumer demand choked.
“For now, it’s the borrowers on the front line of crises. But inside banks, executives say they’re trying to anticipate which other industries will start pulling next,” Sridhar Natarajan and Yalman Onaran wrote for Bloomberg.
